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Historic Conversions
Old buildings offer new opportunities

Later this month, one of downtown Dallas' oldest office buildings, The Mercantile Building, will re-open as a mixed-use project with rental apartments and ground-floor retail. The building, redeveloped by Cleveland, Ohio-based Forest City, is just one of several historic buildings that have been updated and converted as part of the city's urban redevelopment and revitalization efforts.

The Merc, as locals call it, illustrates a growing trend in the commercial real estate industry. As more cities look to revitalize their urban cores, abandoned historic buildings are finding new life. From coast-to-coast, historically significant or unique buildings are being saved from demolition by developers like Forest City and are housing a mix of uses ranging from boutique hotels to trendy apartments and edgy shops.


These historic renovation projects usually produce tasty returns, but often require far more effort, patience and creativity than new development, especially when it comes to finance and construction. "Historic conversions are very complicated," says David Levey, executive vice president of Forest City Residential. "They're not for the faint of heart because they can be costly and fraught with a variety of issues."

Taking a risk
The challenges presented by historic conversions haven't deterred Forest City from tackling a number of these projects. In addition to The Merc, the company has redeveloped several warehouses in Richmond, Va. and a historic hotel in downtown Philadelphia.

The Richmond project, dubbed Tobacco Row because of the tobacco that was stored in the warehouses, is widely considered one of the largest contiguous historic renovation efforts in the U.S. Forest City purchased seven buildings just east of the James River that were previously owed by Phillip Morris in the mid 1990s, but it wasn't the first developer to try to convert these warehouses - another company had tried to turn them into apartments, but had failed almost before it got started.

Despite that, Forest City was determined to redevelop the warehouses. "These buildings had great bones - high ceilings and gigantic windows," Levey notes. "To be able to take something like that and make it marketable today is just plain fun."

The company embarked on a redevelopment plan that called for a mix of residential and retail. "We felt that this project needed to have service retail to make it successful," Levey explains. But he spent about two years trying to persuade national retailers to take space in the buildings. "It's much more complicated than if you go to the suburbs where you're creating an entirely new environment," he points out.

Levey ended up bringing a 35,000-square-foot grocery store to Tobacco Row, along with a CVS pharmacy, and also convinced Philadelphia's Old Original Bookbinders restaurant to locate its first restaurant outside of its hometown in the project.

This quarter 2008, Forest City will open the last building in Tobacco Row, completing the transformation of a vacant, blighted part of Richmond into a vibrant mixed-use neighborhood with residences and retail. In all, the project had a price tag of more than $180 million.

"The cost to do a rehab is usually greater than the cost to do a new development, but most cities don't want everything built 100 years ago to be torn down," Levey says, adding that Forest City used historic tax credits to finance portions of Tobacco Row. "There's not a deal that we've done that would make any financial sense without them."

Relying on tax credits
Grand Rapids, Mich.-based Second Story Properties is also a fan of historic tax credits, which are available from the U.S. government, as well as most state governments. The company, which has completed 20 historic conversions in its hometown, uses these tax credits for almost every deal.

"Historic tax credits provide much needed equity," says president Sam Cummings. "In many cases, historic buildings are in areas that are challenging to finance because they're blighted or unproven for a specific type of development. Banks look at you cross-eyed when you come to them wanting a loan for these projects, so you have to put in an extraordinary amount of equity."

Second Story Properties got involved in historic conversions about 15 years ago when it acquired an old, vacant warehouse in downtown Grand Rapids for about $4 per square foot. "We realized that we could amass a critical mass of these buildings and could redirect an entire neighborhood," Cummings explains.

The company finished its first conversion project in 1996, the adaptive reuse of a warehouse into a 13-unit apartment building. "People thought we were crazy because this building was in a marginalized neighborhood," Cummings says. "We were urban pioneers and we were making the market."

Second Story's historic apartment building leased up quickly and encouraged many other developers to tackle historic conversions in downtown Grand Rapids. Today, most of the city's historic buildings - from 1880s Italianate mid-rise buildings to early 1900s distribution facilities - have been redeveloped into mixed-use projects.

Creating a new market
Like Grand Rapids, most of St. Louis' historic buildings have been renovated or are in the process of being transformed - primarily because of the state of Missouri's efforts to preserve the city's history. In the late 1800s and early 1900s, St. Louis was the second largest city in the nation and hundreds of office buildings and warehouse facilities were built during its heyday. By the 1980s, most of the commercial buildings along Washington Avenue in the city's urban core had been abandoned or were demolished.

The state created a historic tax credit program that pays for 25 percent of the renovation cost, which helped developers convert Washington Avenue into the city's new "Loft District". (Rhode Island is the only other state with a higher renovation credit at 30 percent.)

The District has been in redevelopment for about five years and includes several projects including The Bogen and The Ventana, two mixed-use projects redeveloped by locally-based Jacobs Development Company. Located on Washington Avenue, both The Bogen and The Ventana offer residential condos above ground-floor retail.

"Renovating a 100-year-old building is far from easy, but creating a new market is the most difficult thing about historic conversions," says John Monshausen, vice president of development for Jacobs Development Company. "You have to be creative in every sense - what the space looks like and how to generate demand - because this is not a proven market."

Monshausen says that Jacobs Development Company utilized tax credits on The Bogen and The Ventana and will likely use them on its newest project The Avenida. "The tax credits have been the catalyst to redevelop St. Louis' historic buildings and helped subsidize projects for developers," he contends, adding that the average return for a historic conversion is 15 percent.

But, most developers who are involved in historic renovations aren't in it just for the juicy returns. "The reward transcends the simple economics of the transaction," Cummings says. "The reward also comes from saving and preserving the social history of an area."

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